MCAA U3IP

Management Control
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Careful considerations have to be taken before deciding what actions have to be considered for a production line that is recording a net loss. At Overall Production Company, an income statement shows that the company is experiencing a net operating loss of $15,000 resulting from the production of round heat exchangers.
The initial step is to consider the impact of the financial sector on the company after closing down the production of round heat exchangers. The company will lose $80,000 contribution margin earned from the sale of round heat exchangers. The total contributions margin will reduce to $510,000. The Company will be relieved of $47,000 spent on advertising expenses and payment of the line supervisor. However, depreciation and general factory overhead expenses will be distributed to the other production lines (Susmita, 2018). Assuming these expenses are allocated equally to each line of production, the total fixed costs will be $483,000 as shown in table 1.
Total Round Rectangular Octagonal
Sales $860,000 – $500,000 $360,000
Variable expenses $350,000 – $200,000 $150,000
Contribution margin $510,000 – $300,000 $210,000
Less fixed expenses
Advertisement $175,000 – $110,000 $65,000
Depreciation $95,000 – $50,000 $45,000
Line Supervisor salaries $13,000 – $7,000 $6,000
General factory overhead $200,000 – $114,000 $86,000
Total fixed expenses $483,000 – $281,000 $202,000
Net operating income $27,00…